Beyond its effect on people, the continuing COVID-19 pandemic has had severe effects on the Indian and global economies. Maintaining liquidity can act as a bridge until economic activity improves, and a number of insurance and risk management strategies can enable that process.

India’s non-bank lending sector was hit by a crisis in 2018 when a large financier unexpectedly defaulted, and the nation now needs it to stay healthy in order to prevent gross domestic product from shrinking further. The reach of shadow banks extends into many corners of the economy, as they lend to a wide range of businesses from road-side teashops to tycoons.

NBFCs have been a pivotal part of the Indian credit ecosystem, given their last-mile connect and expertise in tapping unbanked borrowers as well as micro, small and medium enterprises. But with a predominantly wholesale resource base and lack of access to systemic liquidity support, NBFCs are more vulnerable to liability-side stress compared with banks. Further, any stress in the NBFC sector can force into funding deficiencies in the segments they lend to, which can then change into systemic issues. Support from banks for NBFCs at this period will be all the more crucial in the context of stability of the financial system at large.

Liquidity covers of Non-Banking Financial Companies(NBFCs) have not come downsignificantly over the past two months, CRISIL’s analysis of the NBFCs it rates indicates. However, fund-raising continues to be a challenge for most NBFCs because investors remain risk-averse. With debt repayments remaining high, moratorium on loans NBFCs had taken from banks will offer them material liquidity support. The liquidity covers for NBFCs could reduce in the event of weak incremental funding, collections and limited moratorium on their bank borrowings.

The RBI have also introduced a major stimulus package and taken other measures to ease companies’ pain and ensure capital is readily available.But the cash influx from the authorities hasn’t ousted the concerns among investors about NBFCs. There are worries that bad debt will rise in the sector as the lockdown to curb the spread of the coronavirus has battered the nation’s businesses and left millions jobless.

The Reserve Bank of India (RBI) on 22/01/2021 proposed to tighten rules for major non-bank lenders to prevent a collapse in one of them from affecting the financial system.The regulator proposed to classify the non-banking financial companies (NBFCs) into four categories, depending on their systemic importance and potential risk to the stability of the financial system. The level of regulatory oversight will vary depending on the size of the lenders, among other criteria.

While RBI has sought to increase scrutiny of shadow banks, it has also assured them that the proposed changes will continue to allow those engaged in niche sectors and markets to have flexibility in business operations.

All NBFCs with assets of up to ₹1,000 crore will fall under the NBFC-Base Layer category. They comprise more than 9,200 of India’s 9,425 non-deposit taking lenders and consist of non-systemically important NBFCs, peer-to-peer lending platforms, account aggregators and non-operating financial holding companies.RBI has raised the net-owned funds requirement for these NBFCs to ₹20 crore from ₹2 crore earlier and also proposed that they can transition to the new regulation over a period of five years. The existing non-performing loan classification norm for these NBFCs will be changed to 90 days from 180 days now.

The NBFC-Middle Layer will consist of non-deposit taking NBFCs classified as systemically important and deposit-taking NBFCs. RBI has proposed no changes to the existing capital requirement for these NBFCs,which currently stands at 15% with minimum tier-I of 10%. However, the regulator has suggested that NBFCs with 10 or more branches will be required to adopt core banking solution. It has also put certain restrictions on lending. These NBFCs cannot provide loans to companies for buyback of securities.

The NBFC-Upper layer could include as many as 30 systemically significant NBFCs, which will be regulated like banks. These NBFCs will have to implement differential standard asset provisioning and also the large exposure framework as applicable to banks. They will also be subject to a mandatory listing requirement. RBI has also proposed to introduce common equity tier-I of 9% for these NBFCs.A chief executive of a large non-bank financier said the impact of the proposed changes that will apply to the upper layer will be limited.

NBFC-top layer is currently empty. However, RBI can move an NBFC to this category if it feels that there is an unsustainable increase in the systemic risk spill-overs from specific NBFCs in the upper layer. These NBFCs will be subject to higher capital charge, including capital conservation buffers. There will also be intensive supervisory engagement with these NBFCs.

The changes aim to avert a crisis like the one set off by a series of payment defaults in 2018 by Infrastructure Leasing and Financial Services Ltd, which was then India’s largest shadow lender. The liquidity crisis that arose squeezed funding to non-banks and has engulfed several other lenders since then.

In April, 2021, the Reserve Bank of India (RBI) allowed banks and non-banks to restructure loans given to individuals and small businesses hit hard by the second pandemic wave. Under the new guidelines, banks can restructure loan exposures up to ₹25 crore, which have been standard as on 31 March 2021.Restructuring under the new framework may be invoked up to 30 September and implemented within 90 days after invocation.

Finance Industry Development Council (FIDC), an association of NBFCs, has sought a central bank liquidity window of ₹25,000 crore to support NBFCs with assets up to ₹500 crore.

From the developments happened over a year, it can be seen that the RBI and Finance Ministry is taking utmost care to support the non-banking financial companies and other intermediaries during this period of National crisis. Apart fromthese measures, by way of stimulus package and in other forms are being taken by the RBI and Finance Ministry to ensure no shortage of liquidity is faced by the NBFC’s, the support from the Banks providing loan facilities to these NBFC’s, recasting of loan by Banks and recovery of debt by NBFC’s will also play important role in strengthening position of NBFC’s and other small intermediaries and to save them from immediately going into the liquidity crisis.

In the event, the lockdown continues and extended beyond the month of June-July, the NBFC’s may face the liquidity crunch and the current window provided by the RBI may not be sufficient to tide over the crisis. Both RBI and Finance Ministry would have to provide for further measures to salvage the situation not only NBFC’s but also for MFI’s, Banking and other intermediaries.

References:

• https://www.crisil.com/en/home/newsroom/pressreleases/2020/06/partial-collections-plus-low-disbursements-equal-some-liquidity-respite-fornbfcs.html

• https://www.livemint.com/industry/banking/rbi-proposes-graded-risk-based-approach-to-regulate-nbfcs-11611321807025.html

• https://www.financialexpress.com/industry/banking-finance/nbfcs-ride-out-pandemic-thanks-to-record-govt-stimulus-steps-even-while-virus-ravages-economy/2084404/

• https://www.livemint.com/industry/banking/nbfcs-are-a-divided-house-over-the-need-for-a-loan-moratorium-11621366117624.html